Lithium Fiscal Regime Advantageous
– But potential risks that could impact expected revenues exist- NRGI
By Daniel NONOR, Accra
An assessment of the fiscal regime of Ghana’s Lithium Agreement by the Natural Resource Governance Institute (NRGI) indicates that while the country’s take for the first lithium agreement is higher than the existing legislated fiscal regime and the regimes of many others, such as Australia, the Democratic Republic of Congo, and Zimbabwe, there are several potential risks that could impact the expected revenues.
The report which was authored by Dennis Gyeyir, Africa Senior Programme Officer and Thomas Scurfield, Africa Senior Economic Analyst of NRGI said the government has negotiated a fiscal regime for the Ewoyaa mine that ensures a higher share of revenue for the country.
10% royalties on gross sales
For instance, the government is eyeing a royalty of 10% on gross sales in this deal compared to existing legislation of five per cent on gross sales revenue for other mineral mines.
Community development fund
Additionally, under the lithium agreement, Barari will contribute 1% of its revenue to a community development fund, a provision absent in the current legislation.
Loss carry forward reduced to 4 years
Furthermore, the loss carry forward period is reduced to four years, compared to the five-year allowance in the existing laws.
Issue with windfall profits
The NRGI report notes that while the Ewoyaa fiscal regime has higher taxes compared to other regimes, it does not adequately capture a larger share of windfall profits.
“Ghana’s approach in negotiating a higher government take sets a commendable precedent for future mining agreements,” the NRGI stated.
To address this, the Institute said it is in sync with some civil society suggestions of replacing the fixed-rate royalty with a variable-rate royalty that would exceed 10% at higher prices, thus establishing a fiscal regime that is more responsive to the mine’s profitability while still generating reliable revenue.
Variable rate royalty proposed
The report noted that since Ghana allocates 13% of its royalty revenue directly to mining communities, a variable rate royalty would ensure that the people most affected by the mine’s social and environmental impact benefit from any windfall profits.
The report also suggested that to ensure that the anticipated revenues are not jeopardized, the government should require that prices for tax purposes be based on a pricing benchmark to prevent under-pricing.
Limits on interest the mining company can deduct from taxable income
Additionally, the institute has suggested that limits should be placed on the amount of interest the mining company can deduct from taxable income, regardless of the debt-to-equity ratio, to curb profit shifting.
Make gov’s equity non-dilutable
Furthermore, the mining lease agreement should include provisions to make the government’s equity non-dilutable to protect against share dilution by the companies in the deal, Barari or Atlantic Lithium.
Clear rules in shareholders’ agreement needed
The report states that establishing clear rules in the shareholders’ agreement and ensuring its disclosure will help prevent the underpayment of state dividends while emphasizing the need for continued capacity building among tax and regulatory authorities to effectively audit costs.
Caveat on refinery
The report further suggests that parliament consider the implications of higher taxes for Ghana’s ambitions of constructing a lithium refinery, arguing that if the mining company makes less profit, it might be less inclined or able to finance a refinery.
Rigorous feasibility study on refinery
To effectively assess the broader impact of the Ewoyaa fiscal regime and the potential development of a lithium refinery, the report called for a rigorous and public feasibility study.
Such a study, it says, would enable Parliament and other stakeholders to fully understand the trade-offs involved and to chart the next steps in its pursuit of lithium refining.
Furthermore, the report points out that the Ewoyaa fiscal regime’s higher taxes during periods of low profits should not threaten the mine’s viability.
The fiscal regime’s flexibility in response to the mine’s profitability depends on its composition.
Taxes not linked to profitability regressive
The report highlights that the taxes in the Ewoyaa regime that are not linked to profitability are higher than in other regimes, making it more “regressive.”
This means that even when profits are low, the mine is still subject to higher taxes, a concern that needs careful consideration.
The NRGI report also draws attention to the need for robust measures to protect against tax avoidance.
It states that while the Ewoyaa regime provides reasonable protection through larger royalty and levy payments based on sales revenue, risks remain, particularly concerning underpricing and profit shifting.
The report thus recommends that the government specify in the mining lease agreement that prices will be based on a pricing benchmark such as the Spodumene Concentrate Index (CIF China).
Additionally, limits on debt financing should be considered, including rules that limit the amount of interest companies can deduct based on measures of operating profit, such as earnings before interest, taxes, depreciation, and amortization (EBITDA).
Other concerns raised in the report suggest that the government may face challenges in collecting the expected revenues from its equity in the Ewoyaa project.
To address this, the report recommends that the mining lease agreement must include provisions that prevent the dilution of government equity.
It recommends that even if equity is not diluted, dividends may disappoint, as seen with several of Ghana’s mature gold projects, stressing that the government’s ability to benefit from state equity will depend on the rules in the shareholders’ agreement and its capacity to implement them effectively.
“By taking these steps, the government will have a better chance of generating the benefits that it expects from the Ewoyaa mine and the wider sector.”
